IEA makes bold move to lower oil prices
By FT reporters
For three months, dozens of senior oil officials from the US, South Korea, Germany and Japan worked secretly to execute what was one of the most daring moves by the International Energy Agency since its creation in 1974.
The mission was, on the surface, relatively simple: to replace the loss of production from Libya with oil from western countries’ emergency petroleum reserves.
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Click to enlarge“The key question was the loss of Libya’s high quality, light, sweet oil,” says a senior European industry official involved in the conversations.
In reality, however, the task was a tricky and bold move – one only executed twice before. It required delicate diplomatic manoeuvring. Washington, for example, needed to be sure that Saudi Arabia and others such as Kuwait would not not respond by tightening supply to push prices back up again.
The White House masterminded the plan, officials said, but others rapidly joined as plus-$100 a barrel oil prices hurt the global economy and pushed up inflation across the world. The European Central Bank, for example, raised interest rates in April, citing higher inflation – a point which will not have been lost on European governments.
The International Energy Agency had been tracking the precarious situation in the oil market since February, as Libyan oil production had collapsed from a pre-crisis level of 1.6m barrels a day, to just 200,000 b/d by early April.
Washington took the initiative later that month after senior White House officials convinced President Barack Obama that a partial release of the country’s strategic petroleum reserves was necessary. Officials argued that the shortfall caused by the civil war in Libya was hurting the global economy. Other countries largely agreed.
“The situation in Libya wasn’t causing huge supply problems, but was driving up the oil price,” a government official from a European country says. “And the macro-economic arguments about the danger of this trend made sense to us.”
Former and current officials said that the US, Japan and the European countries slowly convinced themselves that the situation ticked all the necessary boxes to justify a release of oil from the reserves: there was a large disruption in supply, no prospect of an increase in output by Opec, demand was set to increase over the summer and the economy was hurting.
Libya produces one of the most sought after crude oils in the world due to its low-sulphur content. This makes it cheaper to refine into petrol and diesel. Even if Saudi Arabia moved to increase its output, the kingdom could not match the quality gap.
As early as May 11, Mr Obama telephoned King Abdullah of Saudi Arabia to “discuss bilateral issues”, according to the Saudi press agency.
The president was intensely involved in the discussions about the impact of the Middle East turmoil. Gene Sperling, the director of the National Economic Council, headed eight separate cabinet-level meetings on the issue during the last four months, taking their assessments to the president on multiple occasions.
In early May, Mr Obama dispatched a team of senior advisers to the region, including Michael Froman, White House deputy national security adviser, Daniel Poneman, deputy energy secretary, and Neal Wolin, deputy treasury secretary, for talks with Riyadh, Kuwait and Abu Dhabi.
Washington found the Saudis willing to ensure adequate supply.
The IEA nonetheless decided to send a clear message to the market that it was ready to act. On 19 May, at the conclusion of a regular meeting of its board of governors in Paris, the agency said: “We are prepared to consider using all tools that are at the disposal of IEA member countries.” The statement was interpreted as a clear message about the release of the oil reserves. It added, in a direct plea to Opec, that there was a “clear and urgent need” for additional supplies of oil.
On 26 May, the G8 leading economies met in Deauville, France, and President Obama put the issue on the table and lobbied the group. Yet most countries were confident that, at the last minute, Saudi Arabia would convince its fellow Opec members to increase production and resolve the problem. A key concern was political: western nations wanted to avoid a confrontation with Opec and also the perception they were acting for pure economic – and electoral – reasons.
The hope, however, turned into despair as Algeria, Iran, Venezuela and others rejected a Saudi-backed plan for an increase in Opec’s oil output at a meeting on 8 June.
The collapse of the Opec meeting set in train a marathon round of multilateral meetings and bilateral contacts that culminated on Tuesday when the US, Japan, the UK and South Korea requested the IEA to release the reserves.
Nobuo Tanaka, the IEA chief, issued a formal petition on Tuesday, giving 48 hours to the 28 members countries to decide whether to release the stocks. The green light arrived by the 1pm deadline on Thursday. Two hours later, the agency made public it would release 60m barrels of oil during the following 30 days. Seconds later, oil prices plunged.
Reporting by By Javier Blas and Sylvia Pfeifer in London, Anna Fifield in Washington, Peggy Hollinger in Paris, Gerrit Wiesmann in Berlin, Ralph Atkins in Frankfurt, Abeer Allam in Riyadh, Mure Dickie in Tokyo and Leslie Hook in Beijing
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